Determination of the hedge ratio in the two-state model

Assignment Help Financial Management
Reference no: EM131523285

Reconsider the determination of the hedge ratio in the two-state model where we showed that one-third share of stock would hedge one option. The possible end-of-year stock prices, uS0 = $135 (up state) and dS0 = $92 (down state).

1. What would be the hedge ratio for each of the following exercise prices: 135, 122, 112, 92? (Round your answers to 3 decimal places.)

Exercise Price  Hedge Ratio

    135   

    122   

    112         

    92

Reference no: EM131523285

Questions Cloud

Internal rate of return on this investment : What was Joes internal rate of return on this investment?
A car loan that outlasts your car : A Car Loan That Outlasts Your Car. The article mentioned that a $20,000 loan with an 8% interest rate over 8 years instead of a 5% loan over 5 years
Cash flows are expected to grow at constant rate : The firm's value if cash flows are expected to grow at a constant rate of 9% from now to infinity
Input to the constant-growth valuation model : determine the applicable discount rate to use as an input to the constant-growth valuation model.
Determination of the hedge ratio in the two-state model : Reconsider the determination of the hedge ratio in the two-state model where we showed that one-third share of stock would hedge one option.
What was your total return for past year : You purchased a zero-coupon bond one year ago for $285.33. what was your total return for the past year?
Maturity that pays semi-annual interest : Consider a $1,000 face value 6% coupon bond with 3 years left to maturity that pays semi-annual interest.
How much new long-term debt financing will be needed : What was Wallace's total long-term debt in 2016? How much new long-term debt financing will be needed in 2017?
Use the afn equation to forecast broussards additional fund : Use the AFN equation to forecast Broussard's additional funds needed for the coming year.

Reviews

Write a Review

Financial Management Questions & Answers

  Is the bond selling at par at a discount or at a premium

Bond prices and yields Assume that the Financial Management Corporation's $1,000 par value bond has a 5.400% coupon, matures on May 15, 2023, has a current price quote of 112.721 and a yield to maturity (YTM) of 4.361%. Issue date is current in other..

  Difference between the net present worth of machine

Machine A which is a basic model costs $25,000 and lasts 5 years. At the end of the 5 years it has a salvage value of $1,500 and its market value at the end of 3 years is $7,000. The benefit that these two machines are anticipated to provide is $9,50..

  Regional healthcare system is for-profit entity

Regional Healthcare System is a for-profit entity and is planning to purchase an MRI and ultrasound equipment for its new imaging center. The equipment will generate $3,000,000 per year in revenues for the next (5) years. The expected operating expen..

  Plasma are furnace has internal combustion temperature

A plasma are furnace has an internal combustion temperature of 7, 000 degree C and is being considered for the incineration of medical wastes at a local hospital. The initial investment is $299, 000 and annual revenues are expected to be $179, 000 ov..

  Pension plan is annuity with guaranteed return

Your pension plan is an annuity with a guaranteed return of 4% per year (compounded quarterly). You can afford to put $1,800 per quarter into the fund, and you will work for 40 years before retiring. After you retire, you will be paid a quarterly pen..

  Dividend is expected to grow at a constant rate

Boehm Incorporated is expected to pay a $2.30 per share dividend at the end of this year (i.e., D1 = $2.30). The dividend is expected to grow at a constant rate of 9% a year. The required rate of return on the stock, rs, is 15%. What is the value per..

  What is minimum expected annual return for stock

In order to fund her retirement, Michele requires a portfolio with and expected return of 0.11 per year over the next 30 years. She has decided to invest in Stocks 1, 2, and 3, with 25 percent in Stock 1, 50 percent in Stock 2, and 25 percent in Stoc..

  The market price of a security

The market price of a security is $70. Its expected rate of return is 12%. The risk-free rate is 7%, and the market risk premium is 7%. What will the market price of the security be if its beta doubles (and all other variables remain unchanged)? Assu..

  The options have the same premium

If the exercise price for each option is $40, and if the market is efficient, will the options have the same premium?

  What is the break-even salvage value of this project

A project in Malaysia costs $4,000,000. Over the next three years, the project will generate total operating cash flows of $3,500,000, measured in today’s dollars using a required rate of return of 14 percent (this is the PV of the operating cash flo..

  Standard deviation of the rate of return on investment

A project has a 0.76 chance of doubling your investment in a year and a 0.24 chance of halving your investment in a year. What is the standard deviation of the rate of return on this investment?

  What is the value of option to wait

Hickock Mining is evaluating when to open a gold mine. What is the value of the option to wait?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd